Exchange Traitor Fund

By William Davis

Story’s going ‘round Wall Street about the alleged “theft” of a billion-dollar fund, ironically enough a cybersecurity exchange-traded fund with the ticker symbol HACK. It’s a mystery, they say, and the intrigue is “gripping” the ETF world. Why, even NASDAQ claims to be a “victim” of the ETF heist! Hmmm. Sounds a bit interesting.

Best we can tell, HACK was brought to market in 2014 by PureFunds, a damp squib of a company led by an ex-ETF trader named Andrew Chanin. For some bizarre reason, Chanin and PureFunds – neither with any record of product success – were pitched the idea of a cybersecurity offering by the International Securities Exchange, a Silicon Valley-based options and data firm. As odd providence would have it, HACK goes live just days before the 2014 breach of Sony Pictures Entertainment, and the publicity helps PureFunds raise $1 billion in just seven months. Sounds a bit lucky.

Enter, then, ETF Managers Group, another dud of a company, this one led by a former Bear Stearns mortgage trader named Sam Masucci. While it’s normal in ETF world for smaller companies like PureFunds to rely on outside contractors for any number of back-office services, for some bizarre reason PureFunds hands over the keys to the Ferrari. As unexpected fortune would have it, Masucci finds himself with significant control over HACK, including total management of the $600,000 or so in fees paid every month by investors. Sounds a bit rich.

Enter, now, NASDAQ, the opposite of an unsuccessful company, which bought the shadowy ISE and its piece of the HACK business in June 2016. For some bizarre reason, Masucci, now knocking down more than a than $1 million a year from the fund’s outsized fees, unilaterally decides to quit paying NASDAQ and Chanin and strips the ETF of the PureFunds brand. As litigious society would have it, ETF Managers Group is sued by everybody not named Masucci. Sounds a bit nefarious.

We agree with the guy who said the whole mess is “like a car accident, and you can’t look away.” But we’ll take issue with all the hyperbolic reporting on the sordid matter. Fact is, shareholders indirectly own the assets of what is now called the ETFMG Prime Cyber Security ETF and none have or will lose money as a result of the so-called a heist. The HACK story might sound a bit scary, but in the end, it’s only the smell of greed that’s so frightening.

What the equity markets have been doing…

INDEX

Friday’s Close

Two-Week Point Change

Year-to-Date Change

DJIA

25,803.19

+1083.97

+4.39%

S&P 500

2,786.24

+112.63

+4.21%

NASDAQ

7,261.06

+357.67

+5.18%

Russell 2000

1,591.97

+55.01

+3.68%

What the fixed income markets have been doing…

FIXED INCOME

Period Change

YTD

12 Months

Yield

U.S. Treasuries

+0.1%

-(0.4)%

+1.4%

2.5%

U.S. Investment Grade

+0.1%

-(0.4)%

+7.4%

3.3%

U.S. High Yield

-(0.2)%

+0.7%

+7.4%

5.5%

U.S. Municipals

+0.1%

0.0%

+4.9%

2.4%

Non-U.S. Developed

+0.1%

0.1%

10.2%

0.8%

What the pundits have been saying…

“Investors recognize that the earnings of companies in Europe, the Far East and the emerging markets are growing faster than those in the United States while the price earnings ratios in those regions are lower than those in America. Global investments become more broadly represented in institutional portfolios.”

Byron Wein, Vice Chairman in the Private Wealth Solutions group at Blackstone

What the numbers are saying…

62%

The probability of a rate increase at the Fed’s March meeting, according to the market for federal-funds futures contracts, where traders bet on the path of interest rates. Fed officials, who lifted rates three times last year, debated in December whether tax cuts would force faster rate increases this year.

What people have been saying…

“If you are lucky enough to make it to 89 years of age like I have, things tend to put life in perspective. Trading oil is not as intriguing to me as it once was.”

T. Boone Pickens, oilman, wildcatter, corporate raider, cattle trader, and clean-energy evangelist, on closing the energy-focused hedge fund he has run for the last two decades

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